Buying a house for the first time is an immensely exciting, but also very daunting task! It is almost invariably the first time in your life that you will be in debt for more than you would earn in several years … it’s a scary thought, but if you use that as motivation to help you take the task of choosing the right home loan seriously, only good things can come of it. Today we help you through the process with a logical approach to choosing the right home loan.

How much should I borrow?

In fact, decide how much you can comfortably afford to borrow, not how much you ‘want’ to borrow! Use a mortgage calculator (widely available on the internet) to see what size loan you can get for the monthly repayments you can afford. Remember that you should calculate your upper borrowing limit with a 2% allowance on the interest rate – so, if interest rates were currently 7%, you should calculate what your repayments would be if interest rates went up to 9%.

Once you have an idea of what your maximum repayments are, do a trial run with them by saving the difference between your imaginary repayment amount and your rent. Put this in your home deposit account – it will give you an idea of what it will be like to pay out that amount each week for your home loan.

What home loan term is best?

This will be tied in with your maximum repayment. Naturally, a shorter term means that you’ll pay less overall to the bank, but that you won’t be able to afford as large a home loan. The average is 25 years – use this as your working figure, and if you find you can afford to make extra repayments, do so.

How much deposit should I save?

This depends on two factors – how quickly property is appreciating in the areas you wish to buy in, and how quickly you can save.

You will need a minimum of 5% of the purchase price as a deposit – no deposit home loans have become almost an extinct breed since the National Consumer Credit Protection Act came into force during the GFC.

However, if you can save more of a deposit fairly quickly, you should do so. If you can save 20%, you’ll be able to avoid paying Lender’s Mortgage Insurance on your home loan. This insurance covers the bank in case you default on your loan at a time when the value of the property is lower than the amount owing on the mortgage.

Stay tuned – next time we’ll look at the broad categories of home loans and how you can fast track your mortgage!

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